A new lease of life for the handset market

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Rising smartphone costs have fuelled a demand for leasing solutions

With purse strings tightening, it has become increasingly vital for businesses, particularly those selling higher-priced goods, to find ways to alleviate some of the financial burden for customers – without themselves suffering as a consequence.

As a result, leasing and financing has become key across numerous industries – with opportunities to rent rather than buy becoming increasingly commonplace.

The biggest example of this, is in the car industry which has been completely transformed. In the US, one in three cars are now leased rather than owned. And in the UK last year, of the 2.6 million ‘sales’, 980,000 were on lease agreements – valued at around £16.2 billion.

That trend is now increasingly seen in the mobile industry, rewriting the rules and threatening to end the days of handset subsidy. And the opportunities are vast.

Billions

“Leasing in the telecoms industry will be worth billions over the next few years,” says Daniel Proctor, commercial director of Henry Howard Finance.

“Technology is becoming more and more expensive. Leasing and financing are huge benefits to the mobile channel because it can easily help them avoid paying over the odds for handsets and similar products.”

Lease Telecom is one company specialising in telecommunications finance, which has been quick to identify the needs and opportunities in the market.

Founded in 2014, the Hove-based company, specialises in providing finance solutions for the telecoms sector, offering anything from £1,000 and £1 billion in credit to its customers. To date, it has more than 500 companies on its books (200 mobile specific), include the likes of EE-owned airtime distributor Mainline and IT and mobile distributor Westcoast. It works with five banks (undisclosed) to provide finance.

Founder Simon Fabb says: “The likes of Apple and Samsung launched their own leasing programmes, so they clearly see the opportunity. If those two companies continue to dominate, the market will absolutely be worth billions in the next few years.”

Born in the USA

The US is a perfect business case for the drive towards the leasing of handsets and where the UK is heading. In contrast, a number of US operators no longer offer subsidised devices on contract at all, forcing people to either purchase outright or lease. But it’s not just the US. The UK is now increasingly embracing the trend, most notably early adopters O2. In 2013, the operator launched its Refresh tariff, allowing customers to split up their hardware and airtime for the first time. The move, like with the car industry, allows customers to chop and change their device when they choose, rather than be forced to wait for their 12,18 or 24 month agreement to expire and upgrade. Unlike when buying an item through, say, a fashion catalogue (remember Kay’s?), no interest is charged on the device.

The move, which has since been followed by its rivals (Vodafone Red, for example) has been a major success to date. The operator confirmed to Mobile News that currently more than two million of its 25 million connections are now on a Refresh tariff.

Freedom

A spokesperson for O2 claimed the freedom and flexibility was the main driver behind Refresh’s growing popularity. “Previously if you wanted an early upgrade, you’d have to pay an early termination fee. There was also the issue at the end of a contract that, if you didn’t upgrade, you’d still be paying for your handset despite having paid it off.

“Refresh really makes a big difference because customers don’t fall into those traps and avoid any unnecessary additional payments. It makes much more sense than a standard contract. We’ve halved the bills of those who go for O2 Refresh, saving them on average £216 per year. Our customers are loving it and our churn is at an all time low.”

Refresh follows the termination of O2’s Lease scheme iPhone launched in 2011. This allowed customers to lease 6s a phone,which they had to return after a year. It was scrapped by the operator because of its limitations. The spokesperson adds: “We found customers were locked into Lease too much, and the year-long commitment was too much for them. Customers also wanted to keep their phone for sentimental or reselling values, which they couldn’t with Lease because they had to return the devices.”

Opportunity knocks

All these figures put the spotlight on an industry that is full of opportunity. Many believe the mobile market will operate increasingly in this way in the next few years. CCS Insight chief of research Ben Wood says the growth will be fuelled by consumer demand.

“ M o b i l e financing will be absolutely huge and I believe it will be worth billions over the next few years. Businesses and consumers are becoming increasingly aware of the benefits these kind of upgrade programmes have over conventional ways of purchasing mobile products,” he says.

“I certainly see a trend of this market moving upwards, especially with smartphones being charged at a premium,” adds Lease Telecom boss Simon Fabb. “Businesses won’t always have the cash upfront to fund these expensive devices, which makes finance and leasing such an attractive option.”

Opening opportunities

The growing popularity of leasing and financing can be attributed to advancements in technology and the increasing prices that go alongside them. Businesses are struggling to meet the costs of paying for a batch of flagship handsets in one go. For example, a mobile dealer looking to purchase an entry-level iPhone 6s for just 10 of its staff would have to pay at least £5,390 upfront.

Fabb claims finance and leasing means anyone from a small one-man business to a large distributor doesn’t have this burden. Contracts from Lease Telecom range between one and three years, with the average being a two-year period. Over the last year it has approved more than £12 million in credit to businesses, with 50 per cent of those for smartphones. At least £6 million accounted for over 750 Apple devices per month. Fabb said: “Smartphones cost more than desktop computers at the moment.These costs will continue to create the demand in the market for a finance option. Companies don’t always have capital to spend on equipment. If you’re a smaller dealer having to front that cash on your own makes it really difficult.”

Westcoast’s head of mobile Darren Seward agrees with Fabb. The Theale-based distributor signed a new finance partnership with Lease in the middle of last month, offering its partners the option to purchase products from Westcoast through finance.

He claims the increasing demand for expensive flagships from the likes of Apple and Samsung will only further the demand for finance and leasing. “If you look at the cost of a premium smartphone, you’re looking at spending between £500 and £600,” Seward explains. “That’s a lot of money to finance if spread across an entire company. Customers want the best devices. They want their employees to use the latest Apple or Samsung handset and there’s a lot of pressure on businesses to provide that. Even if you have 10 employees, it’s a lot to fund up front.The benefits of leasing helps businesses with that cash flow.

“The car market is a very good analogy that we’ll use with our customers. It’s exactly the same model, just with phones and solutions. The market is getting more used to this type of model – I can only see the demand increasing.”

Forefront of change

UNSHACKLED.com was launched in June this year by former Phones4u executives John Whittle, John Morris and Steven Lloyd. The Manchester-based e-tailer operates on a similar model to O2’s Refresh Plan, allowing customers to pay separately for a handset and airtime. Customers can choose to take out a loan from Unshackled for these payments, with financing supplied by loan provider Zopa. Airtime is available with all four UK operators and 10 MVNOs, including giffgaff, Tesco Mobile and Virgin Mobile.

Whittle, whose previous roles at Phones4u included chief commercial officer (2013 to 2013), director of commercial, (2011 to 2013) and director of trading (2011 to 2012), agrees with Seward and Fabb. He says: “I fully predict the market will move in this direction and we see ourselves at the forefront of a change in the industry. There are things the telecoms industry can take from the car market because phones are getting more expensive and customers want a greater degree of flexibility and affordability.

“I truly believe the market will eventually move away from traditional 12 to 24 month contracts.”

Savings to be had

Across the industry, concerns have increasingly been raised about unnecessary charges associated with conventional phone subscriptions. A study by Which? in July this year claimed UK mobile subscribers were overpaying a collective £5.4 billion by having more minutes, texts and data than necessary while on a contract. It claimed that consumers could save at least £159 per year by switching to a contract that better suited their own needs.

In a similar survey conducted in January 2015, the consumer watchdog claimed that consumers were wasting £355 million a year by continuing to pay for mobile handsets at the end of their contract. The decision not to upgrade was found by 46 per cent of the 2,000 surveyed.

UNSHACKLED’s Whittle claims the practice of unbundling airtime and handset payments can help consumers avoid such pitfalls. It will eventually get to the point where such options will become more attractive than conventional mobile contracts, he claims. Whittle says: “Our customers are delighted that we’ve saved them on average more than £200 per year. They’re getting exactly the same thing as before. They’re saving money and they have a much greater degree of flexibility. Our customers are surprised at how competitively priced the MVNOs are.

“I see unbundling overtaking the traditional 12 or 24 month contract. I expect in time everybody will buy their phones in a financing mechanic. They’re not locked into paying for the airtime and handset at once. They have more choice in the best airtime contract that suits them.”

Key focus

Redeem Group, one of the UK’s leading handset recycling facilitators (including two million handsets with O2 in past five years) has been developing its own finance and leasing solution over the last year, claiming the area will be a “major focus” for business going forward.

The West Lothian-based handset firm, which had a turnover of £80 million last year, has been working with a number of undisclosed B2B and B2C businesses for its upcoming ‘Redeem Financial Services’ scheme. It will see the company offer finance to partners to pay for mobile devices.

Director of Strategy Sandy Farmer said it is one of the company’s key focus areas right now, but declined to reveal a public release date or any financial targets associated with the upcoming service. “It’s going to form an important part of our business,” he says. “The thing we see from a strategic point of view is that this [leasing] is a trend that is coming and we want to make sure we play a role and bring a lot to that space with a data set.

“Consumers are shifting the way they purchase handsets. You see things like the Apple Upgrade Programme and consumers are looking at moving to a lease or financing option.”

He continues: “The trend towards unbundling airtime, data and hardware has been growing. Consumers are becoming more wary of how expensive it is to upgrade devices and are considering more affordable finance structures.”

Francesco Radicati, market analyst at Ovum adds that splitting the costs of both airtime and handset payments must be done correctly should the end user see any real benefit. He explains that it benefits, not only those who want to upgrade early, but those who are in contracts for the long-term. “When unbundling is done right, it can give customers a lot more flexibility. Some customers who have had their phones for more than two years will see their overall monthly bill drop. It’s much more appealing than a traditional contract.”

Eschewing the traditional banking route

So why are companies like Lease Telecom, Data Select (see box out) and Redeem more suitable for companies to borrow from than traditional banks? The expertise and telecoms industry experience offers various benefits not available with a regular lender.

Fabb, who was previously Data Select marketing manager (2011 to 2013) and Nokia consumer marketing manager (January 2011 to September 2011), claims the industry experience and Lease Telecom’s specialised portal offers a wider range of benefits than a traditional lender. The portal allows any partner to quickly log in and get a quote if they require credit for any device orders.

He says: “There are very few banks who will have a direct supplier relationship. The team at Lease have their own experience in the industry and we don’t set strict targets or charges like a traditional bank.

Differentiation

“Not a lot of solutions are supplied without focus. We developed our portal to combat that.Anyone from an admin to a CEO can get a quote and submit an application in minutes. It also requires very little training and that’s how we differentiate ourselves.”

Farmer echoes Fabb’s comments, arguing that the decade of experience Redeem has in the sector will is much more valuable than anything a regular bank or finance provider can offer. He says: “We have more than 10 years of experience in the mobile industry. Our sales channels, infrastructure and in-house expertise reflects that. All the data we’ve collected allows us to understand the true residuals of a device and we’re able to adjust the best monthly costs based on that.”

Education needed

However, if businesses are to really take the full advantage of leasing and financing solutions for themselves and their customers, a lot more education is required to clear any confusion customers in both consumer and B2B could potentially have, and maximise the number of opportunities. There is still an overall concern throughout the industry that customers are questioning even how the simplest of interest and monthly payments work.

Lease’s Fabb says: “There’s not enough education in the market. A lot of the mobile dealers have sold mobile in a certain way for the last three decades and finance and leasing are new concepts for them. We find a lot of new partners are asking about interest rates and monthly payments.

“When we bring on board a partner, we have a 30-minute screen share of our portal followed by a 30-minute Q&A session. We educated them on interest rates, how to quote and we try to keep everything to a minimum.”

Tip of the iceberg

CCS’ Wood agrees, arguing that consumers and businesses are still far too used to the idea of a 12 or 24-month contract. He argued that more must be done to persuade customers to make the big shift to an unbundled package. He explains: “I think people have become accustomed to the way of just getting a phone on a 12 or 24-month contract. Finance and leasing are difficult concepts to explain to just anyone in a store. If it’s to become more successful, more has to be done around education.

Redeem’s Farmer concludes: “There is still a hell of a long way to go.We are at the tip of the iceberg in terms of these products coming through. Last year it was 20 per cent of iPhone 6s under the upgrade programme and that’s been growing. Sprint had a similar uptake. When you have these propositions structured, they’re very compelling.”

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